Another question: How do you all expect this to scale? Have you tested with many simultaneous connected users? Does the load on the XMPP server scale linearly or super-linearly? How about the load on the clients? Is there a chat-lag effect that can occur?
Based on my understanding of the project and how XMPP works, "server" load which here is equivalent to XMPP messaging load would typically scale approximately quadratically. As the number of clients increases, the amount of inbound traffic scales upward linearly, and the number of clients each message must be dispatched to also increases linearly.
And one more, only loosely related to the above; is there any collision detection (Iirc, the mapserver used to handle this? I'm not sure now, it's been too long for me) or will characters be able to merge/'over-print' visually?
I would suggest, if you do not already do so, start using Icon. Many of your questions like this are likely to be at least partially answered by how Icon behaves.
Edit: Short answer: the game client performs most of the collision detection. I believe that's due to the fact the client does prediction - a technical term which means in many cases, particularly for movement, the game client guesses that most of the things the player does is something the server will be ok with, and so the game client does it without waiting for a server acknowledgement. This is why even on very slow and high latency links player movement was pretty smooth. But when the network was lossy or acknowledgements failed to arrive, the game client eventually was forced to throw its predictions away and reset. We called that "rubberbanding."
In general, I believe City of XMPP is going to work more or less just like Icon, with the primary difference being you'll see other people in their Icons also in your Icon, also doing whatever Icon allowed (its possible there are a few things you can't do in Icon you will be able to do in CoXMPP, as well as a few things they might have restricted that you can do in Icon but they don't want people doing in an unlimited fashion in CoXMPP).